September Producer Prices, Weekly Jobless Claims and Fed Minutes

IN A NUTSHELL: “While the hurricane-driven energy price increase may fade, there still are some cost pressures building in a variety sectors of the economy.”

WHAT IT MEANS:If the Fed is to raise interest rates this year, it will have to defend the move by saying that inflation is on the path toward its target of 2%. Well, the members got some ammunition from the September Producer Price Index. Wholesale costs jumped, led by a surge in gasoline prices. Hurricane Harvey disrupted supply and that led to a rapid rise in prices. About half the increase has already been unwound. But there were other pressures outside energy. In particular, services prices were up in just about every major category except construction. Trade services, transportation and wholesaling all posted significant increases. On the goods side, the situation was mixed. Food prices were largely flat but a surge in crude food prices points to an increase in the future. Consumer durable goods prices, including vehicles, were up. Cleaning and polishing products were up while electronic components and accessories fell. Overall, though, finished goods costs rose moderately, enough to create an acceleration in the year-over-year gain, which is what the Fed watches.

The effects of the hurricanes are beginning to fade from the jobless claims data and the total fell sharply last week. It is now back down to where it was pre-hurricanes. The hurricanes hurt some professions but helped others. But going forward, it is clear that if you have building trades skills and you can move, the hurricane devastated areas have jobs.

The Fed released the “minutes”, actually a sanitized summary, of its September 19-20 FOMC meeting. The important takeaway for many was the intense debate over why inflation remains muted despite the low unemployment rate. There is uncertainty over what is driving inflation and therefore what level of unemployment can be sustained without triggering a sharp rise in prices. Nevertheless, there was a clear hint that the Committee was leaning toward another rate hike in December. The statement read: “…many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.” While not everyone agreed, it appears that enough are behind moving in December that there is a decent probability it will happen.

MARKETS AND FED POLICY IMPLICATIONS:Inflation is not surging but it is also not fading. The report today shows enough broad based price increases that if the FOMC does want to move in December, it has a basis for doing so. Still, we have to see what comes of prices now that the temporary gasoline supply problems have dissipated. And as I always say, the path from wholesale to retail prices is not straight and often dead-ends. So don’t assume that non-energy consumer prices will rise significantly faster anytime soon. As for investors, it’s the start of earnings season. While future inflation and potential rate hikes may sometime become important, I suspect that for now, it’s all about profits.